Allgemein, Economic Forecasting, Economics, European integration, International Market Dynamics, New Political Economy

EU Disintegration Pressure and Germany’s New Instability

 

Prof. Dr. Paul JJ Welfens, Präsident des Europäischen Instituts für internationale Wirtschaftsbeziehungen (EIIW) an der Bergischen Universität Wuppertal; Non-resident Senior Research Fellow at AICGS/Johns Hopkins University; IZA Research Fellow, Bonn. Alfred Grosser Professorship 2007/08, Sciences Po (www.eiiw.eu) welfens@eiiw.uni-wuppertal.de

2015 = 20 years of award-winning EIIW research in Economics

 

March 21, 2016 EUdisintegrationEnglish2016MarchWelfens

EU Disintegration Pressure and Germany’s New Instability

After six decades of growing economic and political integration, in 2015/2016 the European Union is facing disintegration dynamics for the first time where the main impulses are Germany’s strange handling of the refugee wave in 2015 and the British BREXIT referendum of June 23, 2016. Both elements show that the EU cannot survive without a Political Union and that the collapse of the Soviet Union could indirectly translate into a collapse of the European Union: It was mainly a commonly shared fear of the Soviet Union and certain economic benefits which were the political glue keeping the EU together and without this common fear a lack of political discipline has become widespread – visible, for example, in the non-respect of the Eurozone/EU fiscal policy rules in the run-up to the euro crisis in Greece, Portugal, Ireland and Cyprus. Germany and other EU countries pretend that the Soviet collapse has not impacted the EU except for the fact that former eastern European member countries of the Soviet economic bloc would subsequently join the European Union.

An expansion of the EU budget, which could have generated new benefits for all EU member countries, was prevented, particularly by the British government, when the EU expenditures were reduced after the Transatlantic Banking Crisis from 1.24% to just 1% of GDP. It is the British government that now proposes to voters in the UK to consider a vote on the UK either remaining in or leaving the European Union and it effectively means that about three million UKIP voters – getting 12.6% at the national elections in 2015 – can put political pressure on 500 million people in the EU: Conservative Prime Minister David Cameron is under such pressure from UKIP – the British winner of the European elections – that he had to promise the aforementioned EU referendum. Such a referendum has become possible under the Lisbon Treaty which allows EU member countries to leave the European Union. One may point out that should the UK leave the EU other countries are likely to follow, since a smaller European Union is less attractive than a big EU (i.e. including the UK, which represents about 17% of the EU GDP) and since the external perception is that the EU is not a stable politico-economic club, this will reduce the international political leverage in all future negotiations of the EU; the latter effect might even occur if the pro-EU side should have a narrow victory in the BREXIT referendum. France under De Gaulle had always been resistant to allowing the British EU membership, as De Gaulle was not convinced that the UK would really be a strong member country in the EU.

Besides the UK, it is Germany under Chancellor Merkel which is leading the EU into disintegration. Until mid-2015, it was Germany’s standard political wisdom that the country would never again start a war in Europe, would defend Israel’s right of existence and would always be a reliable EU partner. The latter pillar of Germany’s political fundament was as good as destroyed in early September 2015 when Chancellor Merkel unilaterally – not calling for an EU summit to focus on the refugee crisis – decided to open Germany’s borders for refugees that had stranded in Hungary and Greece. Shortly after the decision, the German government then added that the refugee crisis was an EU problem. Most of the EU partners, having been ignored in September 2015, in effect said: No, Germany should take care of the problem itself.

Obviously, the Chancellor’s Office had become so arrogant in the context of the apparently bravely assumed EU leadership role in the face of the Euro crisis that Mrs. Merkel thought she could simply decide about an EU question on her own. Never would Helmut Kohl oder Helmut Schmidt, two former German Chancellors, have made a similar quasi-autocratic decision.

Founded upon of a very thin legal basis – so the view of renowned legal experts – Germany assumed the right to decide about more than half a million asylum-seekers whose case, under the so-called Dublin framework, could normally only be decided in Greece, the first EU country entered by so many refugees coming from Turkey – originally coming mostly from Syria, Iraq and Afghanistan. Greece in turn was unable to cope with its duties to examine the asylum requests of refugees – at first, due to its disastrous economic policy and as regards the sharp overall recession, which set a record for western industrialized countries after five years of consecutive recession, one could argue that Germany is also to blame for the Greek misery because the Merkel government has refused a debt haircut for sovereign creditors – although this would have been both possible and certainly also necessary economically speaking as the IMF has emphasized in 2015 (Germany’s Minister of Finance, Mr. Schäuble, claims that there are legal barriers to Greek debt cutting, but independent legal experts from several universities hold a different view). If Greece had been a normal country with a functional government and administration, Germany’s government would have had no right to assume the asylum examination procedures by effectively replacing Greece in 2015. The German government’s propensity, in the refugee crisis, to explore extreme interpretations of rules and laws – already partly visible in the euro crisis – is doubtful and has raised criticism among many legal experts who often have the impression that the EU no longer represents the traditional EU three pillars: the rule of law, democracy and the market economy.

The EU countries could, in late September 2015, agree that only 120 000 refugees who had at first landed in Italy and Greece would be reallocated across EU countries, but by mid-March 2016 less than 1 000 had actually been reallocated. The German approach to the refugee crisis did not work at all and the more than one million refugees coming to Germany in 2015 have revealed enormous overregulation and poor public service organization in Germany where many cities found themselves unable to cope with the big wave of refugees – fortunately, many private volunteers helped out in this difficult situation. The chaotic impression created by the refugee wave in Germany raised a very unfavorable impression about the federal government of Chancellor Merkel and on top of that came the incidents from the New Year’s Eve night at the Cologne central station, where more than 1 000 women reported being sexually molested and that mobile phones and/or wallets etc. had been stolen – apparently mostly by Muslim immigrants and refugees from North Africa. The political message understood by many voters in Germany was that the leading political parties and government at both a federal and regional level were unable to cope with the refugee challenge. The populist new right-wing AfD party harshly criticized Chancellor Merkel and partly joined forces with the east German xenophobic, anti-Islam Pegida movement.

The state elections – concerning Germany’s economic powerhouse Baden-Württemberg, the Rhineland-Palatinate and the small eastern German region of Saxony-Anhalt – ended with disastrous results for both parties in the federal grand coalition (i.e., the conservatie CDU and the social-democratic SPD; the latter could, however, gain about 0.5% of the votes in the election in Rhineland-Palatinate). The CDU and the SPD lost huge numbers of votes to the new populist right-wing party AfD (Alternative für Deutschland) who succeeded, on the basis of 240 party members in Saxony-Anhalt, in getting 24 members elected in the regional elections. The AfD, initially created by an economist from Hamburg University Mr. Bernd Lucke, who left the party in disappointment in 2015, had hovered in opinion polls at 3% in spring 2015, but due to Merkel’s strange refugee policy in autumn 2015 the AfD obtained double digit results in all three states (15% in Baden-Würrtemberg, 12% in Rhineland-Palatinate, 24% in Saxony-Anhalt). Part of the AfD, which is very well organized across Germany, is openly xenophobic, anti-US (e.g., in the context of the TTIP project) and favors physical violence coupled with racist prejudices.

A new problem since March 13, 2016, is that – following the bad precedent of the unstable Weimar Republic in the 1930s – a strong leftist party plus a strong populist party could, in the future, make a normal coalition of middle of the road parties unworkable; for example, in Saxony-Anhalt the two traditionally big parties, CDU and SPD, are so much weakened that they need the small Green Party to form a governing coalition and this is the only option existing. The AfD is likely to gain additional seats in upcoming regional elections as well as in the national election in autumn 2017. The rise of the AfD has been strongly supported in 2013-15 by the influential conservative newspaper Frankfurter Allgemeine Zeitung – more specifically, by its Economics and Business Section, with its strong long run opposition to the euro. A report by the Bertelsmann Foundation has shown in 2014 (spotlight Europe 2014/No. 2) that readers of the Frankfurter Allgemeine Zeitung internet-edition features a strong overlap with AfD voters. Who would ever think that a conservative newspaper would support a xenophobic right-wing populist party which destabilizes Germany and the EU? The level of economic competence of the Economics and Business Section is apparently quite low; e.g., for several years readers were told that the Eurozone countries’ euro rescue policy would lead to high inflation (in reality, the ECB had to start fighting deflation in 2015) and that civil servants are the richest group in Germany (complete nonsense as any careful statistical analysis shows: Entrepreneurs are, of course, the richest household group) – maybe this low level of analytical competence in key economic issues also extends to the quality of assessment of political developments.

In March 2016, the EU-Turkey summit brought a preliminary solution to the refugee crisis by undermining the business case of people smugglers and human traffickers in Turkey who had helped ship an estimated million people to Greece in 2015 when the country was totally overwhelmed by the refugee wave. The deal is such that as of March 20, 2016, illegal immigrants entering Greece from Turkey would be sent directly back to Turkey which could, in turn, send up to 72 000 Syrian refugees to the EU who would distribute the incoming refugees internally. Turkey would also get € 6 billion in EU support for the costs of refugee for Turkey, which has about 2.8 milllion refugees. Moreover, Turkish citizens will soon get visa-free access to the EU and the EU-Turkey membership negotiations would resume. The expectation is that the number of new refugees to the EU will strongly reduce in 2016, not least since the situation in UNHCR refugee camps in Iraq, Afghanistan, Lebanon, Jordan and Turkey should improve as the London donor conference of early 2016 raised new funds for bringing the provision of food and services back to a decent level – before the US, Kuwait and several EU countries had not paid over funds which had been promised to the UN, with the result that part of the refugee crisis was indeed triggered by the hunger and misery prevalent in many UNHCR camps.

Many EU countries have erected new national border controls in order to fend off refugees coming from Greece or via other EU entry countries. This in turn shows that there are serious problems with respect to controlling the EU’s external borders – with poor countries, such as Greece and Bulgaria, left to fend for themselves instead of organizing a joint financing of external border control. As a consequence of the resurrection of national border controls, the Schengen Treaty – relevant for all EU countries except for the UK and Ireland – that brings free movement of people without border controls between continental EU countries is impaired: Thus the GDP of the EU could be reduced by 0.8% in the long run and two to three million additional unemployed people can be expected. It is noteworthy that Mrs. Margaret Thatcher, in responding to a question about whether the UK should join the Schengen Treaty, responded (to paraphrase) ‘No, since we do not want a situation in which Greek civil servants would effectively control access to the UK’.

The EU will face serious challenges. With France facing serious economic problems plus a new broad fear of terrorism and Germany being politically destabilized through Merkel’s decision-making in September 2015 as regards the refugee crisis and the following enormous rise of the AfD, there will be lower economic growth in Germany and the eurozone, respectively (Germany accounts for about 23% of EU GDP; France for 16%); what’s more, the xenophobic AfD will impair Germany’s FDI inflow and thus innovation and growth dynamics and a move towards more well-paid skilled jobs. There will be lack of EU leadership and this in turn will undermine the EU’s stability. A weakened EU implies a weaker NATO and this should worry the EU.

Mr. Putin is likely to cheer this new EU weakness and the rise of the AfD and the number of populist xenophobic parties in many EU countries is bound to increase. The only positive perspective for 2017 in Germany concerns the election victory of the Green Party Baden-Württemberg Minister-President, Winfried Kretschmann, who was not only re-elected but his party is now No. 1 in that state with 31% of the vote. If Kretschmann should become the first green candidate for Chancellor in Germany, he should be able to get about 40% of the votes in Baden-Württemberg and about 20% for Germany as a whole in the national elections in 2017. This might be enough to create a conservative-green coalition government that may be expected to push for ecological innovation and green growth.

The political pitfall of a visible non-EU spirit of Chancellor Merkel is another argument for calling for an EU political union in the long run. An EU that spends only 1% of GDP in Brussels is much too small in fiscal terms. The US federal government expenditure relative to GDP of 9% (without social security expenditures) is so much higher than the relative level of EU expenditure, but Germany and the UK are the main countries that so far prevent an adequate reform of vertical government expenditure. With infrastructure and military expenditures largely concentrated in Brussels, the Eurozone/the EU could have a much more effective fiscal policy and fiscal federalism also gives clear arguments that the EU’s government expenditures are much too small. The strange hybrid institution of a European Commission that is both a legislative and an executive institution is also doubtful; a true Eurozone Parliament and a Eurozone government is what is needed, plus a distinct EU income tax. The overall tax burden should, however, fall in the EU, if all political layers are added up – efficiency gains in a political union could lead to this result. If the EU should disintegrate, there will be globally negative spillover effects since other regional integration schemes will also be destabilized (for example, ASEAN and Mercosur). The British steps towards a BREXIT will dearly cost the UK and continental Europe plus the world economy at large. Like Mrs. Merkel, Mr. Cameron is a conservative politician – both not having a bright intellectual perspective. The expansion of populist right-wing parties in the EU will lead to more protectionist policies in key European countries. This is neither in the interest of Europeans nor of the US, China, ASEAN or Japan. The AfD has also indicated that its leaders favor more cooperation with Putin’s Russia and they are against the proposed Transatlantic Trade and Investment Partnership of the EU and the US. The AfD, UKIP, Front National and other right wing populist parties will lead Europe back into the late 19th century. One can only worry about such irresponsible perspectives. Historically, Chancellor Merkel’s ill-guided refugee policy amounts to a broad political destabilization of Germany and the EU, respectively.

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Allgemein

New EU Integration as Basis for Stability in the 21st Century

 

Prof. Dr. Paul J.J. Welfens, Jean Monnet Professor for European Economic Integration; Chair for Macroeconomics; President of the European Institute for International Economic Relations at the University of Wuppertal, (Rainer-Gruenter-Str. 21, D-42119 Wuppertal; +49 202

4391371), Alfred Grosser Professorship 2007/08, Sciences Po, Paris,

Research Fellow, IZA, Bonn,

Non-Resident Senior Fellow at AICGS/Johns Hopkins University, Washington DC

welfens@eiiw.uni-wuppertal.de , www.eiiw.eu                        File prEeuWorldEconomy2015

EIIW 2015 = 20 years of award-winning research         October 20, 2014

  • EU Integration: Facing Responsibility in the World Economy
  • Bold and Broader Reforms in the European Union Needed

New EU Integration as Basis for Stability in the 21st Century

So far about 80 billion people have lived on this earth. In 2015/2016, the half billion of people in the EU28 are facing key challenges in contributing to sustained growth, stability and prosperity in Europe and indeed worldwide. The transatlantic banking crisis, the euro crisis and the Ukraine-Russia crisis represent three serious problems which have undermined the stability of the Europe. The banking crisis was caused by an overlap of highly ineffective banking regulation in the US, the UK and Ireland; by 2014 the US has overcome most of the short-term problems, but the debt-GDP ratio has increased by about 30 percentage points in the period from 2008-2013. In the UK the government debt-GDP ratio has increased by almost 40 points in the same period and Ireland stands for +80%. The European Union and the USA stood on the brink of a collapse after the bankruptcy of September 15, 2008 – that bankruptcy was allowed to happen by the Bush Jr. Administration and it brought about a massive reduction in investors’ appetite for risk. My conclusion in October 2008 (the date of finishing the manuscript of my book Transatlantische Bankenkrise) was that the euro area was going to face a crisis in Greece, Portugal, Spain and Italy, as these countries had high debt-GDP ratios, high deficits or high foreign indebtedness; and I mailed the manuscript on October 30, 2008 to the German chancellor’s chief economic advisor. While the US has partly adopted adequate reforms for the banking system, the overall reforms are inadequate as the institution, which in the Summer of 2006 wrote that Ireland’s banking system was sound, has not made any relevant reforms (the so-called FSAP update on Switzerland a few years ago also missed the point, as UBS was identified as a sound bank): Obviously, the IMF’s approach to its own Financial Sector Assessment Programme is inadequate and needs urgent reform. Have the EU countries called for any reforms here? Not at all. An IMF reform is urgent now.

The euro crisis is the next crisis in the western OECD which undermines stability in Europe and the world economy. The euro countries and some of the other EU countries – not including the UK – have accepted a new Fiscal Pact that is supposed to make sure that in future budget deficit rules are better observed than under the Stability and Growth Pact with its 3% deficit-GDP limit. The limit in the new Pact is 0.5% of a structural deficit-GDP ratio; here structural means that business cycle effects are filtered out. It will hardly be possible to implement this limit and it might even be at odds with the maximum 3% limit under the Stability and Growth Pact. The euro integration should bring about major economic benefits for all member countries, almost 1% of GDP in the long run – every year, provided that the Eurozone can provide a euro that holds a larger share in world currency reserves: a share of about 35% should be possible, up from the 28% in 2007, the year immediately prior to the crisis. Among economists and politicians there is broad confusion about the euro and the requirements for stability and long-term success. France and Italy as well as other euro countries are reluctant to stick to either the old or new limits of the deficit-GDP ratio and the EU’s rule that the difference between the debt-GDP ratio and the 60% limit for that ratio should be reduced by 1/20 every year is largely ignored. Some long-term consolidation is needed but consistent EU-wide public investment – driving economic growth – is also critical for economic stabilization, since the reduction of the debt-GDP ratio should naturally also come from economic growth; this is quite obvious in a period in which Germany and France face a real interest rate of only about 1%. The euro area cannot return to stability if three elements are not adopted:

  • A switch to a more explicit policy coordination which should go along with a supranational virtual expenditure-GDP ratio of about 6% where the main focus would be on infrastructure investment – about 2% of GDP – and military expenditures (another 2% of GDP) plus promotion of innovation and life-long learning (about 1% of GDP) plus the current 1%. The first six months of unemployment compensation should come from Brussels in the long run. A virtual joint budget of 6% of GDP could easily be introduced, but it requires in the medium term that all euro countries’ ministers of finance would use the same budget software – solving this issue should not be a matter of years (!). The supranational policy layer must be big enough that the bankruptcy of a member country of the euro area could be a valid political option: a bigger supranational government in the eurozone will make it possible to, for example, let Greece go bankrupt should politicians in Athens try a second massive deficit fraud as was the case in the election year of 2009. With a bigger supranational government, even the bankruptcy of a country will not bring about an end to all government activities in a euro member country!
  • The long-term creation of a euro political union on the basis of democracy, the rule of law and social market economy. There would be euro bonds placed in the market and based upon some discretion of the eurozone government and the respective Parliament. National governments should have the option of a structural deficit-GDP ratio of not more than 0.25% of GDP, 0.5% of GDP would be the maximum structural deficit-GDP ratio at the supranational policy layer. Assuming a trend growth rate of output of 1.5 %, the long run debt-GDP ratio in the eurozone would thus not exceed 50%. These rules must be incorporated in national constitutions.
  • There should be eurozone political parties; otherwise the natural goal of leading national politicians will not be to become the head of the respective eurozone party and the head of the eurozone government. Never would a political deficit fraud of the type of the Greek problem of 2009 occur in a US state, since notifying ¼ of the true deficit-GDP figure to Washington would mean the immediate end of a national party career for the respective representative of that state.

If the eurozone countries would shift towards such deeper integration policies, the euro countries should be able to achieve at least 2% of economic growth provided that the expansion of information and communication technology is adequately promoted. The share of real ICT investment – based on nominal ICT investment figures deflated by the relevant price index (EU Klems database) – in real GDP is more than twice as high as looking at nominal ICT-nominal GDP shares suggest (see WELFENS/IRAWAN/PERRET, 2014: www.eiiw.eu). For a euro area with solid growth, low inflation and full employment, there will be strong pressure on the other European countries to join; this would hold particularly true for the UK whose debt-GDP ratio is likely to exceed that of the euro area within a few years. This assumes that the current timidity in EU integration is overcome. There is not much doubt that the UK will leave the EU after a referendum in 2017 which, however, would be totally counter to its own economic and security interest. The UK can have no interest in leaving the EU with a shaky euro area in which Germany dominates economically, while military security is inadequate in both the eurozone and Western Europe. With the Ukraine-Russia crisis lingering, Western Europe has every interest in not letting the EU disintegrate. If the UK should leave, Brussels should raise the price for that non-solidarity much higher, beyond the refutation of the free mobility of labour with the EU as was the case with Switzerland in 2014.

If the EU falls apart, the blueprint for integration in other parts of the world would be damaged. Asia, Latin America, Africa and Europe need integration schemes that work, otherwise regional and global economic and political chaos will start spreading.

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